Due to volatile and record-breaking valuations, cryptocurrencies and their underlying technology, blockchain, have been at the forefront of financial news headlines. Blockchain technology is, very simply, a decentralized digital ledger that records economic transactions in a way that cannot be copied or destroyed, therefore eliminating fraudulent or duplicative transactions. Bitcoin is perhaps the best known cryptocurrency, and for which blockchain technology was invented. Bitcoins are discovered through “mining,” a process whereby computers use processing power to solve difficult puzzles. The miner who finds the solution receives bitcoins, essentially digital tokens, as a reward. Unlike traditional currencies, bitcoin and other cryptocurrencies do not require a third party or central authority for its users to transfer value.
Bitcoin has surged in value since its creation in 2009. Professional and casual investors alike have bought bitcoin in droves over the past months. Despite the potential opportunity for significant returns on investment, investors are questioning if cryptocurrencies are stable enough to continuously yield returns. One major hurdle to the future stability of cryptocurrency is its overall liquidity. Increases in the volume of bitcoin trading has enhanced its liquidity, however, widespread acceptance of cryptocurrency by merchants and retailers may be necessary to reduce its volatility and further improve bitcoin’s overall liquidity.
Though widespread acceptance by merchants could help stabilize cryptocurrency, the current volatility is a concern for retailers. Additionally, the IRS presently classifies cryptocurrency as property, not as currency. This classification means that cryptocurrencies must be valued at their fair market value, which may pose problems for vendors accepting the wildly fluctuating bitcoin. Retailers also worry about blockchain technology’s scalability problem—its inability to efficiently process a growing number of transactions. When transactions take longer to process, transaction fees increase and small cryptocurrency transactions become uneconomical.
While the surge in bitcoin’s value towards the end of 2017 created considerable interest among investors, that surge has not necessarily correlated with a material change in its application or increased mainstream acceptance of cryptocurrencies as a form of payment. While there are a few companies that currently accept cryptocurrencies as payment, it is unclear whether more retailers will accept bitcoin or other cryptocurrencies at any time in the near future. But if more retailers and online companies do choose to accept cryptocurrency, large retailers—especially large online retailers—may consider accepting it in order to maintain their share of the market.